3. Qualified Charitable Distributions (QCDs)

The Qualified Charitable Distribution, or QCD, is arguably the most powerful tax-saving tool available to retirees with traditional Individual Retirement Accounts (IRAs). It is a special rule that allows you to give to charity in a way that provides a massive tax benefit.

What is a QCD?

A QCD is a direct transfer of funds from your IRA, payable directly to a qualified charity. To be eligible to make a QCD, you must be age 70½ or older. You can donate up to $105,000 (for 2024) per year using this method.

The Double Tax Benefit

The magic of the QCD is that the amount you donate is excluded from your taxable income. This is much better than a regular charitable deduction for two key reasons:

1. It counts towards your RMD: Once you turn 73, you are required to take a certain amount of money out of your traditional IRA each year. This is called a Required Minimum Distribution (RMD). RMDs are normally counted as taxable income. A QCD can satisfy all or part of your RMD for the year, but the money is never added to your income in the first place.

2. You get the benefit even if you don’t itemize: Since the QCD amount is excluded from your income directly, it lowers your AGI. You do not need to itemize your deductions to get this tax benefit. This is a huge advantage for the many seniors who now take the higher standard deduction.

By lowering your AGI, a QCD can also help you in other ways. It can reduce the portion of your Social Security benefits that are taxable and may help you avoid being pushed into a higher Medicare premium bracket.

How to Do It Right

The process is simple, but the rules are strict. The money must go directly from your IRA custodian to the charity. You cannot withdraw the money yourself and then write a check to the charity; that would be a taxable distribution. Most IRA providers have a simple form to initiate a QCD. They can either send a check directly to the charity or issue a check from your IRA account that is made payable to the charity, which you can then deliver.

Be sure to get a written acknowledgment of your donation from the charity. You will need this for your tax records. The distribution will be reported on your Form 1099-R from your IRA custodian, and you must correctly report it on your tax return to ensure it is excluded from your income.